How to Calculate Foreclosure of a Loan?

No one ever wants to pay additional interest on a loan, everyone tries to pay off their loans asap. You might have taken a loan during a need but as soon as the funds are arranged, you want to close the loan. This procedure is called foreclosure of a loan. You can consider a foreclosure of a loan before the tenure ends by paying some pre-decided penalty and saving interest amounts.

Here is how you can consider using a loan foreclosure calculator to know the exact amount of penalty to be paid in case of foreclosure.

What is Foreclosure Of A Loan?

Let’s understand the term loan foreclosure in detail. Generally, you need to repay the loan using Equated Monthly Instalments for a decided period to cater to the amount. Here in loan foreclosure, the case is different.

You can be debt free or free yourself from recurring EMIs by considering a foreclosure of a loan by paying the remaining principal amount and some pre-penalty charges. It will be a lump sum payment option to close the loan.

This step to pre-close the entire loan amount before the due date is called loan foreclosure. You can pre-plan the foreclosing month after completing the lock-in period of paying EMIs. This pre-planning will help you to arrange the amount after foreclosure calculations.

How to use the Foreclosure Calculator?

Once you decide to foreclose the loan amount, your next step is to know the total repayment. Choose a month in which you will repay the amount. Then you can do loan foreclosure calculations to get an exact amount.

Alternatively, you can also consult your lending partner. They will tell you penalty charges and offers if you are ready to foreclose the loan.

The loan foreclosure calculator calculates the outstanding balance of the loan. It also shows interest amounts after analyzing the remaining EMI.

Here are the components to calculate the loan Foreclosure amount.

• Total Loan Amount
• Pending Loan Amount
• Tenure to Close the Loan
• Rate of Interest
• Number of EMIs Paid Already
• Foreclosure Month
• Loan Foreclosure Penalty Charges

Above mentioned factors will give you an idea of how much you will be paying extra on a foreclosure.

Let’s take an example to understand better.

Suppose you have taken a loan of RS 2,50,000 for your home. The repayment tenure is 24 months with an interest rate of 6%. After paying 6 EMIs, you wish to pre-close the loan in the 7th month. Now let us calculate the foreclosure amount considering these numbers. Below are the amounts you will get from the calculator.

• Foreclosure Amount Rs. 1,90,277
• Monthly EMI Paid: Rs. 11,080
• Interest Paid: Rs. 6,758
• Interest Saved: Rs. 9,166
• Interest before Foreclosure: Rs. 15,924

Foreclosure of Loan – Step-by-step Guide

Every bank and financial institution has a slightly different payment process for loan Foreclosure. They also have a difference in charges and terms. So we suggest you follow the below-mentioned steps for loan foreclosure.

Find the nearby branch

You can’t foreclose a loan online. Therefore you will need to visit the nearest branch of your bank. You can also contact the customer care team and ask about the process.

Submit an application

The officer at the bank or the customer support representative will guide you through the process. In the next step, you will need to apply for a loan foreclosure. You can obtain the application form from the branch of your bank.

Documents submission

You will need to provide certain documents for foreclosing the loan. Attach the necessary documents mentioned by the bank. The most common are:

1. Identify Proof
2. PAN Card
3. Aadhar Card
4. Loan Document 
5. Loan Account Details
6. Bank Statement for the proof of EMI payment    

Payment

Here comes the crucial step for which you are reading this article. Your bank will check and verify your documents. Once done, they will calculate the loan foreclosure amount and inform you. It will include the remaining principal amount, penalty charges, and taxes.

Post calculations, you will be asked to clear the due amount within the stipulated time. You get multiple payment options, like Demand Draft, RTGS, NEFT, or cheque. So you can choose any one of them according to your convenience.

Document Receipts

Your bank will do the rest of the formalities for loan foreclosure after clearing all the due payments. It involves stopping EMI reminders, returning all the original documents to you, and providing a clearance certificate. All these activities by the bank will take up to a couple of weeks.

You will get the following documents:

1. Acknowledgement letter
2. Loan foreclosure payment receipt
3. NOC to close a home loan
4. No Due Certificate
5. Loan Closure Certificate

Inform Credit Rating Agencies

This one could be the last step of loan foreclosure. Inform the credit rating agencies after paying the due amount and completing all the formalities. Rating agencies will update your credit score accordingly. It is crucial if you are planning to apply for another loan.

What is the Loan Foreclosure Month?

It is the month when you pay an outstanding loan amount before the due tenure. Your bank should stop EMI calculations and notifications from that month.

You can refer to the before-mentioned example to know what foreclosure month exactly is. It is the 7th month you can consider to be a foreclosure month.

What are the Penalty Charges for Foreclosing a Loan?

You are liable to pay a certain percentage of the outstanding loan amount at the time of foreclosing. It is a prepayment penalty for loan foreclosure. This prepayment penalty charge varies from 2 to 5 per cent from bank to bank. You also have to pay applicable taxes.

Every bank charges this penalty to compensate for the lost interest that occurs due to the prepayment of the loan. Do loan foreclosure calculations carefully and maintain your financial position.

Conclusion

You need to have a plan and calculate a foreclosure loan amount. Consult your bank and apply the proper procedure as mentioned above. Also, make sure to inform your bank 30 days in advance that you are foreclosing the loan. Visit the official website of Piramal Finance to know the nuances of foreclosure of loans. Do not forget to check their products and services.